Badger Capital v. Chambers Bank of North Arkansas

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 10-3067
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Badger Capital, LLC; S. Bradley *
Daniels, *
*
Plaintiffs - Appellants, *
*
Jay Garnett; Karen Garnett, *
*
Plaintiffs, *
*
GWE Holdings, LLC; Terry Harper; *
LR Holdings, LLC; David Mix; Powell *
Properties, LLC; James Renner; Scott *
Smith; Arthur Starr; James Stilwell; *
Laura Stilwell, *
*
Plaintiffs - Appellants, *
* Appeal from the United States
v. * District Court for the
* Western District of Arkansas.
Chambers Bank of North Arkansas; *
Chamber Bancshares, Inc.; John *
Russell Meeks, Individually and as *
agent for Chambers Bank or North *
Arkansas and as agent for Northark *
Holdings LLC; John Doe, I, *
Individually and as agent for Chambers *
Bank or North Arkansas; John Doe, II, *
Individually and as agent for Chambers *
Bank or North Arkansas; Growth *
Group, LLC, Florida; Growth Group, *
LLC, Arkansas; Edward Davis, *
Individually and as agent for Growth *
Group, LLC - Florida and Growth *
Group, LLC - Arkansas; Rick Hancock, *
Individually and as agent for Growth *
Group, LLC - Florida, Growth Group, *
LLC - Arkansas and Strategic Builders, *
LLC; Morgan Hooker, Individually and *
as agent for Growth Group, *
LLC - Florida, Growth Group, *
LLC - Arkansas and Strategic Builders, *
LLC; Mitchell Massey, Individually *
and as agent for Growth Group, *
LLC - Florida, Growth Group, *
LLC - Arkansas, Strategic Builders, *
LLC and Growth Ventures, LLC; *
Growth Ventures, LLC; Scott McLain, *
Individually and as agent for Growth *
Ventures, LLC and McLain Group, *
LLC; Dirk Van Veen, Individually and *
as agent for Growth Ventures, LLC and *
Zen Holdings, LLC; Heritage Coast *
Properties, LLC; Bruce Millender, *
Individually and as agent for Heritage *
Coast Properties, LLC; Strategic *
Builders, LLC; McLain Group, LLC; *
Watering Place, LLC; J. Y. Massey, *
Individually and as agent for Watering *
Place, LLC; Zon Holdings, LLC, *
*
Defendants - Appellees, *
*
Northark Holdings, LLC, *
*
Defendant. *

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 ___________

Submitted: June 14, 2011
Filed: August 16, 2011
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Before BYE and MELLOY, Circuit Judges, and ERICKSEN,1 District Judge.
___________

MELLOY, Circuit Judge.

Badger Capital, LLC and its co-plaintiffs (collectively referred to as "the
Investors") sued Chambers Bank of North Arkansas ("the Bank") for fraudulent
concealment. Specifically, the Investors claimed that the Bank failed to disclose to
the Investors certain information regarding a real-estate development. The district
court2 granted summary judgment in favor of the Bank, finding as a threshold matter
that the Bank owed no duty of disclosure to the Investors. The Investors appeal, and
we affirm.

I. Background

In May of 2005, Mitchell Massey planned a real-estate development in
Eastpoint, Florida. Massey's plan included the construction and sale of 220 residential
units on waterfront real estate. The development—called Eastpoint Landing—was to
offer its residents swimming pools and boat access "in a new urban atmosphere." In
furtherance of this plan, Massey formed Eastpoint Redevelopment, LLC ("Eastpoint")

1
The Honorable Joan N. Ericksen, United States District Judge for the District
of Minnesota, sitting by designation.
2
The Honorable Jimm Larry Hendren, Chief Judge, United States District Court
for the Western District of Arkansas.

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on June 21, 2005, to purchase a roughly seventeen-acre parcel of real estate from
Heritage Coast Properties, LLC ("Heritage") for $19 million.

Eastpoint financed the $19 million purchase by obtaining a $14 million loan
from the Bank and by raising capital through a private offering to "accredited
investors." Eastpoint solicited investors by using a private offering memorandum
("POM"). Under the terms of the POM, Eastpoint offered 10,000 shares of ownership
in Eastpoint at a price of $1,000 per share. The offering began on June 20, 2005, and
was scheduled to close either when the 10,000 shares were sold or on June 30, 2005.
The POM gave Eastpoint the authority to extend the offering period to December 31,
2005, but, under the POM, the offering was "not conditioned upon the sale of any
aggregate minimum number of [shares]."

So long as Eastpoint's offering period remained open, the POM provided that
"investors' funds [would] be placed in an interest bearing escrow account at Chambers
Bank of North Arkansas (the 'Escrow Agent')." Once the offering period closed, "the
subscription funds [were to] be transferred by the Escrow Agent to a bank account as
designated by [Eastpoint]." The POM's glossary also defined "Escrow Agent" as the
Bank. Additionally, a subscription agreement—which the Investors had to complete
before purchasing interests in Eastpoint pursuant to the POM—indicated that the Bank
would hold the Investors' funds in escrow until Eastpoint either accepted or rejected
the subscription. Despite these identifications of the Bank as escrow agent in the
POM and subscription agreement, however, the Investors had no verbal or written
communication with the Bank regarding their investment in Eastpoint.

As it turned out, one of the investors in Eastpoint was also an employee of the
Bank. The employee, J.R. Meeks, received 1,000 shares in Eastpoint on June 27,
2005—one day before Eastpoint closed its real-estate transaction with Heritage and
its loan with the Bank on June 28. In exchange for the ownership interest, Meeks
executed a $2 million personal guarantee on Eastpoint's loan from the Bank.

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 In addition to investing in Eastpoint, Meeks helped Eastpoint acquire its loan
from the Bank.3 Specifically, Meeks was briefed regarding Eastpoint's financial
condition prior to Eastpoint's acquisition of the loan, Meeks communicated with the
lawyers who prepared the POM, Meeks was present at the June 28 closing, and,
Massey stated that Meeks "had worked hard to get the deal done." However, on
August 1, 2005—approximately one month after receiving his 1,000 shares of
ownership in Eastpoint—Meeks essentially returned the shares in exchange for
Massey taking responsibility for Meeks's $2 million personal guarantee.

In the months following Eastpoint's real-estate acquisition, real-estate values
in Florida "plummeted." (At least part of the decline appears to have been attributable
to damage from multiple hurricanes that struck the Gulf Coast area within sixty days
following Eastpoint's real-estate purchase.) Consequently, Eastpoint had difficulty
paying its loan from the Bank. Ultimately, the Bank foreclosed on its mortgage in
January of 2009. The Bank purchased the property at the foreclosure sale, and, during
2009, the real estate was appraised at a value of $1.69 million.

On June 19, 2008, the Investors filed an action against the Bank, Massey,
Meeks, and a number of other entities and individuals who participated in the
Eastpoint development. Among other claims,4 the Investors sued the Bank for

3
The parties dispute what Meeks's official employment position was at the
Bank, but there is no dispute that Meeks had an intimate connection with the Bank.
He was the nephew of the Bank's president, his mother and two of his aunts sat on the
Bank's board of directors, and he was a 0.0002% owner in the Bank.
4
The Investors also sued the Bank for civil conspiracy, usurious practices, and
other equitable relief. The Bank moved for summary judgment on these claims, but
the district court denied the Bank's motion. These claims were tried to a jury, and the
jury rendered a verdict in favor of the Bank. The Investors do not appeal any aspect
of the disposition of these claims.

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fraudulent concealment. On January 4, 2010, the Bank moved for summary judgment.
The district court granted the Bank's motion, and now the Investors appeal.

II. Discussion

The Investors argue that the district court erred in granting summary judgment
in favor of the Bank on their fraudulent-concealment claim. The Investors argue that
they have established a triable issue of fact regarding whether the Bank had a duty to
disclose to the Investors certain information regarding Eastpoint's real-estate
transaction. According to the Investors, the Bank had a duty to disclose that (1)
Eastpoint's private offering had not raised $10 million at the time the offering closed,
(2) Eastpoint obtained a loan in addition to its loan from the Bank to pay for some of
the costs to close the real-estate purchase with Heritage, and (3) Meeks and an entity
operated by Massey's father received equity interests in Eastpoint without making any
cash investment.5

The district court granted summary judgment in favor of the Bank because it
found that the Investors had failed to create a triable issue of fact on the threshold
issue regarding whether the Bank owed a duty to disclose to the Investors information
regarding their participation in Eastpoint's private offering. We review this decision
de novo, "reading the record in a light most favorable to the [Investors] and giving the
[Investors] the benefit of all reasonable inferences drawn from the record." Chivers
v. Wal-Mart Stores, Inc., 641 F.3d 927, 932 (8th Cir. 2011) (internal quotation marks
omitted). "We will affirm if no genuine issue of material fact exists and the [Bank]
is entitled to judgment as a matter of law." Id. (internal quotation marks omitted).

5
It is unclear from the Investors' briefs whether this list of allegedly
undisclosed facts is exhaustive. Whether this list is exhaustive is irrelevant, however,
because we agree with the district court that there is insufficient evidence indicating
that the Bank owed a duty to disclose to the Investors information regarding their
participation in Eastpoint's private offering.

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 Under Arkansas law, "when a failure to speak is the equivalent of fraudulent
concealment," "the law imposes a duty to speak rather than remain silent." Ward v.
Worthen Bank & Trust Co., N.A., 681 S.W.2d 365, 368 (Ark. 1984). "Such a duty
of disclosure arises only where special circumstances exist." Union Nat'l Bank of
Little Rock v. Farmers Bank, 786 F.2d 881, 887 (8th Cir. 1986) (citing Berkeley Pump
Co. v. Reed-Joseph Land Co., 653 S.W.2d 128 (Ark. 1983)). Such "special
circumstances" may exist between parties that have a "confidential relationship" when
"one party knows another is relying on misinformation to his detriment." Ward, 681
S.W.2d at 368. The Investors argue that they have produced sufficient evidence that
"special circumstances" existed in this case which obligated the Bank to disclose the
above-referenced facts to the Investors. See Berkeley Pump, 653 S.W.2d at 134
(holding that there must be sufficient evidence regarding the existence of "special
circumstances" before the jury may consider the issue).

The Investors first argue that there is sufficient evidence that special
circumstances exist because there is sufficient evidence for a jury to find that the Bank
served as an escrow agent for Eastpoint's private offering. Arkansas courts have noted
that an escrow agent is in a confidential relationship with the other parties to an
escrow agreement. Collins v. Heitman, 284 S.W.2d 628, 633 (Ark. 1955). In this
case, however, the district court found there to be insufficient evidence that the Bank
was an escrow agent because, even though the POM and subscription agreement
indicated that Eastpoint and the Investors intended the Bank to be an escrow agent,
there was "no evidence" indicating that the Bank had entered into an oral or written
escrow agreement or had seen the POM or subscription agreement prior to closing the
loan with Eastpoint on June 28, 2005. The Investors do not appear to dispute these
findings. The Investors argue, however, that there was evidence indicating that the
Bank had implicitly agreed to serve as an escrow agent.

Arkansas courts have noted that even if an entity does not expressly agree to
serve as an escrow agent, the entity may be held liable as an escrow agent if the entity

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has implicitly "agreed to act as such and is aware of the terms under which the deposit
has been made and the conditions upon which it may be released." Lasley v. Bank
of Ne. Ark., 627 S.W.2d 261, 263 (Ark. Ct. App. 1982) (emphasis added); see also
Rosell v. Pulaski Bank & Trust Co., 582 S.W.2d 1, 3 (Ark. 1979) (finding that a bank
was estopped from denying that it was holding particular property in escrow because
the bank was holding the property in a file that also included a document that appeared
to provide for the bank serving as an escrow agent for the property); Smith v. Dixon,
386 S.W.2d 244, 246 (Ark. 1965) (finding sufficient evidence that a bank agreed to
serve as an escrow agent because a contract designating the bank as an escrow agent
had been delivered to the bank and the bank had "knowledge of the escrow
provisions" while holding the property that allegedly was in escrow). Thus, even
though there is no evidence indicating that the Bank expressly agreed to serve as an
escrow agent, the Bank could be held liable as an escrow agent if the Bank saw the
POM or subscription agreement prior to receiving the Investors' subscription funds.

In this case, however, there is insufficient evidence indicating that the Bank saw
the POM or subscription agreement prior to receiving the Investors' subscription
funds. As noted above, the Investors do not dispute the district court's finding that
there is no evidence that the Bank viewed these documents until June 28, 2005. (The
Investors argue that Meeks signed a subscription agreement and thus bound the Bank
to serve as an escrow agent, but the Investors have not included a copy of this signed
agreement in the record.6) Meanwhile, the Investors alleged in their complaint that

6
Although Meeks's attorney stated at oral argument that Meeks testified at trial
that he signed the subscription agreement, Meeks's attorney is not representing the
Bank, this trial took place after the district court's grant of summary judgment on the
Investors' fraudulent-concealment claim, and the Investors failed to make the trial
transcript part of the record. Even if the Investors had produced a copy of the
subscription agreement signed by Meeks, however, we decline to address whether this
evidence would create a triable issue of fact regarding whether the Bank agreed to
serve as an escrow agent, especially because it is unclear whether Meeks allegedly
signed a copy of the agreement before or after the Investors wired their funds to the
Bank.

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they wired their funds to the Bank from June 23 to June 28. Thus, the undisputed
facts indicate that by the time the Bank may have seen the POM or subscription
agreement, the Investors had already wired their funds to the Bank. Consequently, the
evidence does not indicate that the Bank was aware of the terms of the POM or
subscription agreement when the deposits were made. Based on the record, therefore,
we agree with the district court that there was insufficient evidence for a jury to find
that the Bank served as an escrow agent for Eastpoint's private offering. Accordingly,
there was insufficient evidence to find that the Bank had a confidential relationship
with the Investors that would have given rise to the special circumstances creating
disclosure duties for the Bank under Arkansas law.

The Investors argue that even if the Bank and the Investors were not in a
confidential relationship, special circumstances still existed in this case which created
disclosure duties for the Bank. Arkansas courts have noted that a confidential
relationship may not be necessary to create special circumstances for purposes of a
fraudulent-concealment claim. See Holiday Inn Franchising, Inc. v. Hotel Assocs.,
Inc., No. CA 10-21, 2011 WL 657222 (Ark. Ct. App. Feb. 23, 2011) ("The duty to
disclose is not limited to confidential or fiduciary relationships . . . ."). However,
Arkansas courts appear to require the existence of some type of relationship or contact
between the parties before they conclude that special circumstances exist. See, e.g.,
Camp v. First Fed. Sav. & Loan, 671 S.W.2d 213, 215–16 (Ark. Ct. App. 1984)
(finding that a bank owed a duty of disclosure to a purchaser of real estate because,
even though the bank was not the seller, there was evidence that the bank had "made
its offices available for the conclusion of the transaction" and that the purchaser had
"relied considerably upon the integrity of [the bank] throughout the negotiations");
Holiday Inn, 2011 WL 657222 (finding that a hotel franchisor owed a duty of
disclosure to a hotel franchisee because the parties had maintained a decades-long,
personal relationship in which they would regularly communicate regarding potential
business opportunities).

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 In this case, the Investors point to a number of facts that they claim establish
the presence of special circumstances. None of these facts, however, establish that the
Bank had any type of contact or relationship with the Investors. Indeed, the Investors
concede that they had no oral or written communication with the Bank. Without
additional evidence indicating that the Bank and the Investors had some type of
relationship or contact with the Investors, we agree with the district court that there
is insufficient evidence to find that special circumstances existed in this case.

III. Conclusion

In sum, the district court properly found there to be insufficient evidence of
special circumstances that obligated the Bank to make disclosures to the Investors
regarding their investment in Eastpoint. Therefore, we affirm the district court's grant
of summary judgment in favor of the Bank on the Investors' fraudulent-concealment
claim.
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